Property Damage, Occurrences, Delays, Offsets and Fees. California Decision is a Smorgasbord of Construction Insurance Issues

Garret Murai | California Construction Law Blog | November 13, 2017

I read once that 97 percent of cases never go to trial. However, there are still the ones that do. And, then, there are the ones that do both. The following case, Global Modular, Inc. v. Kadena Pacific, Inc., California Court of Appeals for the Fourth District, Case No. E063551 (September 8, 2017), highlights some of the issues that can arise when portions of cases settle and other portions go to trial, the recovery of delay damages on a construction project through insurance, and the recovery of attorneys’ fees.

Global Modular, Inc. v. Kadena Pacific, Inc.

The U.S. Department of Veterans Affairs contracted with general contractor Kadena Pacific, Inc. (Kadena) to oversee construction of its Center for Blind Rehabilitation in Menlo Park, California. Kadena, in turn, contracted with subcontractor Global Modular, Inc. (Global) to construct, deliver and install 53 modular units totaling more than 37,000 square feet for a contract price of approximately $3.5 million.

Because Kadena had contracted with another subcontractor to install the roofing, Global agreed to deliver the units covered only by a roof deck substrate comprised of a three-quarter inch sheet of plywood. Delivery of the units was originally scheduled for the summer, however, due to project delays the units were not delivered until October and November.

Well, you can guess what happened.  The rains came and the units were damaged.

The Kadena-Global subcontract provided that Global would assume responsibility “for any loss or damage to the [units] . . . however caused, until final acceptance thereof by [Kadena].” The contract conditioned “final acceptance” upon the VA’s approval of the units. Kadena, however, as the general contractor, was responsible for the overall project schedule.

When Global refused to pay Kadena, Kadena sued, and Global countersued for the water damage. Before trial, the parties entered into a partial settlement. Global paid Kadena $321,975 except for claims covered by Global’s insurance policy with North American Capacity Insurance Company (NAC) and Global received $153,025 to dismiss  its failure-to-pay claims. At trial, Kadena presented evidence of its cost to repair the water damage and was awarded approximately $1 million.

In a separate action brought by NAC, Kadena and NAC filed competing motions for summary judgment on the issue of whether NAC’s policy required it to indemnify Global for the approximately $1 million award in the other action. The trial court ruled in favor of Kadena finding that the award was covered under the NAC policy. The trial court also ruled that the award should be offset by the $321,975 Global paid in settlement and that Global was liable to Kadena for $360,000 in attorneys’ fees.

NAC, Kadena, and Global each appealed, with: (1) NAC arguing that the water damage was not covered under its policy; (2) Kadena arguing that $321,975 settlement paid by Global should not be offset; and (3) Global and NAC arguing that the $360,000 in attorneys’ fees should not have been awarded to Kadena.

Messy enough for you?

The Appeal

NAC’s Argument That the Water Damage was Not Covered Under its Policy

On appeal, NAC, Global’s insurer, argued that the water damage was not covered under its policy. Typical of commercial general liability insurance policies, the policy covered “property damage” caused by an “occurrence,” which was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” From this broad occurrence-based coverage, the policy carved out a variety of exclusions.

One of those exclusions (Exclusion j(5)) excluded coverage for “[t]hat particular part of real property in which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” NAC argued that the phrase “are performing operations,” refers to works in progress and that the exclusion applies when property damage occurs before construction is complete and, because Global had not yet completed installation of the units, the exclusion applied. Global, on the other hand, argued that the phrase “are performing operations” only applied to particular components Global was physically working on at the time of the property damage and, because the water intrusion occurred while Global  was not working on the units, the exclusion did not apply.

Another exclusion (Exclusion j(6)) excluded coverage for “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” NAC argued that, because Global inadequately waterproofed the units, Global’s “work” was “incorrectly performed” and the exclusion applied. Global, on the other hand, argued that the term “work” refers to a product, such as warped or uneven floors, not to a process like covering units with plastic tarps, and that even if its waterproofing efforts were ineffective, the “particular part” of the “work” that was “incorrectly performed” was the use of a plywood substrate not the interior parts of the units.

While acknowledging NAC’s argument that commercial general liability insurance policies “are not designed to provide contractors and developers with coverage against claims their work is inferior or defective,” the Court of Appeal stated, “[t]he problem with NACs’ argument is that it is based on its view of the underlying policy of commercial general liability insurance and not on an application of the policy language to the facts of the case.” And, here, tarping the units, even if performed incorrectly or inadequately was not a part of Global’s “work.”

With respect to Exclusion j(5), the Court of Appeals concluded that the active, present tense construction of the policy language, “are performing operations,” indicated that the exclusion only applies to damage caused during physical construction activities and, because Global was not physically working on the units at the time of the water damage, the exclusion did not apply. With respect to Exclusion j(6), the Court held that the “only arguably defective components or parts of Global’s work are the plastic tarps, as they failed to keep the water out,” but “more importantly, there was no allegation the items for which Kadena sought repair and replacement costs – the drywall, insulation, framing, and ducting – were defective” (emphasis in original).

Result: Win for Global.

NAC’s Argument That Delay Damages Were Not Covered Under its Policy

On appeal, NAC further argued that the delay damages awarded for the 131 days Kadena spent remediating the water damage were not covered under its policy because it did not constitute “property damage.”

The Court of Appeal disagreed stating, “contrary to NAC’s contention, delay damages arising from “property damage” fall under the insuring clause, which obligates NAC to ‘pay those sums that the insured becomes legally obligated to pay as damages because of . . . . ‘property damage’ to which this insurance applies’” (emphasis in original). While the policy does not define damages, held the Court, “courts generally interpret the term to mean payments made to compensate a party for direct and consequential injuries caused by the acts of another” and “[h]ere, the 131 days of remediation was time Kadena could have spent completing the project had the units’ interiors not been damaged. That delay constitutes a consequential loss (a loss occasioned by the water intrusion) and as such, is part of the damages NAC must pay ‘because of’ property damage.”

Result: Win for Global.

Global and NAC’s Argument that Attorneys’ Fees Were Not Recoverable by Kadena

On appeal, NAC and Global argued that attorneys’ fees were not recoverable by Kadena because Kadena had released its right to obtain attorneys’ fees under the terms of its settlement with Global.

Under Code of Civil Procedure sections 1033 and 1033.5, explained the Court of Appeals, attorneys’ fees can be claimed as costs if allowed under law or statute. Further explained the Court, the Kadena-Global subcontract included an attorneys’ fee provision stating that Global “expressly agrees” to pay the reasonable attorneys’ fees Kadena incurs in “enforcing any provision or obligation arising under the contract.” This provision, while a one-way attorneys’ fee provision permitting only Kadena to recover attorneys’ fees, became bilateral under Civil Code section 1717, which provides:

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

Because the settlement agreement was intended to resolve all of the parties disputes except for claims NAC would cover, the agreement obtained two provisions, one releasing “all claims” arising from the VA project and another carving out a limited subset of claims arising from the VA project that the parties were reserving for trial:

4.1.1 Notwithstanding the language of Civil Code section 1542 and waiver provided in Section 4.2 of this Agreement, it is the parties’ express intent and they so agree that this agreement does not release claims from the Project related to  property damage, personal injury, [loss] of use and other claims that are covered under the [NAC] insurance policies described in Section 4.9.1 of this Agreement, true and accurate copies of which are attached to this Agreement as Exhibits “A” and “B”

(emphasis in original).

Based on this language, held the Court of Appeals, the settlement agreement allows Kadena to pursue its water damage claim and, as the prevailing party, to seek attorneys’ fees as part of that claim.

Result: Win for Kadena.

Kadena’s Argument that the $321,975 Settlement Paid by Global Should Not be Offset

Finally, on appeal, Kadena argued that the $321,975 settlement paid by Global should not offset the $1 million damage award covered by NAC’s policy because the payment represented payment in exchange for Kadena’s release of claims other than its water damage claim. In support of its argument, Kadena pointed to the Kadena-Global settlement agreement, which provided that the parties were agreeing to release all claims against one another except for claims from the project “related to” claims covered by NAC’s policy.

“The equitable concept of offset,” explained the Court of Appeals, “recognizes it is unfair to require a defendant to compensate a plaintiff twice for the same injury.” “Thus, to warrant offset, Global’s settlement payment to Kadena must have compensated Kadena for the same harm as the jury’s damage award.” But here, held the Court, the jury was instructed by the trial court that any awarded damages should be limited to damages related to water remediation only and not to defective workmanship or pre-rain delays.

Result: Win for NAC.

Isn’t it nice when everyone’s a winner?

Conclusion

Global Modular underscores that, while commercial general liability policies are not intended to serve as a warranty covering poor workmanship, they do cover “property damage” that “occurs” from poor workmanship. Further, the case clarifies that delay damages may be recoverable depending on the language of the insurance policy. And, finally, the case serves as a reminder that when settling portions of a case, it is important to be clear what specific portions of a case are being settled, as parties may not seek damages for those settled portions, or an offset may apply.

New Jersey Court: Continuous Trigger Ends When Nature of Damage Is Known

Melissa Brill and Laura B. Dowgin | Cozen O’Connor | October 20, 2017

Last week, the New Jersey Appellate Division issued a decision that may have a significant impact on insurance coverage for progressive property damage claims in the state. In Air Master & Cooling, Inc. v. Selective Ins. Co. of Am., No. A-5415-15T3, 2017 WL 4507547 (N.J. Super. Ct. App. Div. Oct. 10, 2017), the court first confirmed that a “continuous trigger” applies to third-party construction defect claims. A continuous trigger requires multiple successive insurers on the risk from the date of exposure through manifestation to cover a loss. Previously, New Jersey appellate courts had applied “continuous trigger” to analogous cases, such as property damage and bodily injury claims arising from the installation of asbestos products, environmental contamination, and toxic torts. At least one trial court had applied a continuous trigger to “delay manifestation property damage claims.” See Cypress Point Condominium Ass’n v. Selective Way Ins. Co., HUD-L-936-14, 2015 WL 1515944 (Law Div. Mar. 30, 2015). The Air Master decision confirms that a continuous trigger theory will be applied to allegations of continuing property damage over a period of time in the construction defect context.

The insured in this case, Air Master, had performed HVAC work at a condominium building in Montclair, New Jersey between November 2005 and April 2008. The condominium association brought a lawsuit against certain contractors after water infiltration and resulting damage was discovered. Air Master was named as one of several third-party defendant sub-contractors. Selective issued a series of policies to Air Master from June 2009 through June 2012 and denied coverage to Air Master, arguing that the property damage had already manifested before the June 2009 policy incepted. Selective pointed to a November 2010 local news story that had reported that residents began noticing water infiltration starting in early 2008. Air Master argued that the water damage was not discovered until the condominium association’s expert consultant issued a report in May 2010.

After confirming that continuous trigger was the appropriate legal framework for progressive property damage caused by construction defect(s), the issue before the court was to determine the endpoint for a covered occurrence — or the last “pull of the trigger.” The court concluded that coverage ends when the “essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it.” Air Master argued that this should be further narrowed to when there is expert or other proof that links the injury to the particular conduct of the insured. This was akin to the equitable tolling doctrine developed in the statute of limitations context, whereby an injured plaintiff has additional time to file suit until they have reason to know they have been injured and to attribute that injury to the fault of a particular defendant. The court rejected this theory, stating that the “policy considerations that justify the equitable tolling of statutes of limitations for plaintiffs do not pertain to insured defendants who have potentially caused a progressive injury.” (emphasis in original). The court instead held that the end date for coverage is the date of initial damage manifestation common to all defendants, without attribution to the particular insured.

This decision clarifies the law in New Jersey as to the appropriate coverage period for continuous property damage claims caused by construction defects. However, determining the manifestation date that effectively ends coverage may prove to be a fact-intensive inquiry. The court found that the manifestation cannot be “merely tentative,” but need not be “definitive or comprehensive.” Rather, there must be awareness of an “essential” manifestation, which falls somewhere between tentative and definitive. In Air Master, the court refused to accept Selective’s argument that the news report of resident complaints in 2008 was adequate to prove manifestation and remanded the case for further discovery on the issue. An expert or transition report detailing the nature and extent of property damage is likely sufficient to prove manifestation. However, there is the possibility that the date could be earlier if there was sufficient evidence of earlier knowledge.

Windstorm Insurance May Not Be Your Only or Best Option

John A. Moore | Daily Business Review | October 2, 2017

As commercial and residential property owners in South Florida assess their damage after Hurricane Irma they should be cognizant that a claim against their own windstorm insurance may not be the only or best option. This is true in part because making a claim against one’s own insurer will inevitably require the payment of a deductible and may result in future higher premiums. Accordingly, consideration should be given as to whether other sources of recovery may exist to cover the damages.

An analysis of the damage including the causes is a necessary starting point. If, for example, a structural component such as roof shingles or membranes failed, the failure might be due to a manufacturing defect or defective installation. In those situations it may be possible to seek recovery from the product manufacturer or those involved in the construction, including the contractor, engineer and architect either based upon a construction defect claim or a warranty claim.

If the failure is the result of a construction defect the next aspect to consider is whether the work that failed was performed within the last 10 years. The 10-year time frame is important because Florida Statute Section 95.11(3)(c) provides a 10-year statute of repose for construction defects that requires a lawsuit be brought within 10 years “after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer whichever date is latest.” Although the law is clear that any construction defect claim is barred if it is not commenced within the 10-year statue of repose, the timing of when that 10-year period is triggered is less clear and may be later than one would think. For instance, a Florida state court ruled that the date of final payment instead of the date the work was completed was the point at which the statute of repose started to run. Whereas another Florida state court decided that the trigger for the statute of repose could be the date at which the engineer of record filed a final plat for the project, even though that filing took place three years after the certificate of occupancy had been issued and the owner had taken possession of the property.

Warranty Considerations

With respect to a potential product or workmanship warranty claim, obviously the specific language of the warranty needs to be reviewed to determine what the warranty purports to cover and to exclude. Again, it is important to know the cause of the damage, keeping in mind that there may be more than one cause, as it is more likely that coverage under the warranty will exist if the damage is caused by wind and driven rain as opposed to damage caused by windblown debris. The warranty may contain language that excludes coverage for damages caused by “Acts of God” which is an expression frequently used in the law and generally refers to damages caused by natural disasters or forces of nature that exist independent of any human acts. And although hurricanes are generally considered to be an “Act of God,” the inclusion of such language does not necessarily mean that one cannot pursue a warranty claim. It is possible to challenge such exclusions in situations where the product or work failed in wind speeds that are within the design criteria for the property’s location. With respect to Hurricane Irma, the National Weather Service in Miami’s preliminary reports of wind speeds in Miami-Dade and Broward County show that the sustained wind speeds did not exceed those of tropical force winds, which is less than 74 mph, and that the maximum hurricane force gusts did not exceed 100 mph. These wind speeds are well within the South Florida Building Code design criteria.

Interestingly, if the issuer of your warranty declares it to be void because the product or work was exposed to hurricane force winds, it may be possible to claim the value of the loss of that warranty as one of your damage components in a property insurance claim, provided of course that you suffered actual direct physical loss or damage to covered property.

If it is apparent that the neighbor’s tree or its limbs falling onto your property caused the damage, the general rule is that you are responsible and you would need to make a claim with your own insurer. If, however, the tree was diseased, had dead limbs or had been otherwise improperly maintained it is possible to prove that the neighbor was negligent and therefore liable for the damage.

Accordingly, the options available to a property owner will be dependent upon the type of damages and the cause of them, and in the case of construction defects whether the work was done within the last 10 years.

Connecticut Notice of Claim Requirements

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | September 30, 2017

Contrary to most New York policies which require notice to be given “promptly”, Connecticut policies tend to require notice “as soon as practical.”

Prior to the Second Circuit Court of Appeals ruling in Arrowood Indemnity Co. v. King,1Connecticut law held that an insurer could be entirely discharged from its duty regarding liability on an insurance contract when the insured failed to provide proper notification of a loss, and the delay was either unexcused or unreasonable. Contrary to New York, which does not care if the insurer is prejudiced by the delay, Connecticut would allow the case to proceed if the insured could show the insurer was not prejudiced by the delay of notice. The insurer had a continuing duty to provide coverage absent a showing of “material prejudice,” even if the literal terms of the notice provision were not met.”2 The burden of establishing timely notice or lack of delay was on the insured.

The Second Circuit Court of Appeals asked the Connecticut Supreme Court to address the questions regarding fact circumstances that can be considered in determining whether there has been compliance with the duty to notify an insurer of an incident/accident for which coverage is claimed.

The Connecticut Supreme Court overruled Aetna Cas. & Sur. Co. v. Murphy, holding that the insurer now must prove it has been prejudiced by the insured’s alleged failure to comply with a notice provision.3

Just because the insurer now has the burden to show it was prejudiced to disclaim coverage for late notice of claim, if an insured makes multiple repairs prior to the insurer’s ability to inspect the loss (as is often required in a policy to ‘mitigate further damage’), the insurer will have a much stronger argument if they are not afforded the chance to view the property prior to repair or replacement of damaged components.

As always, read your policy for exact language contained, but notify your carrier immediately if any damage is seen.
___________
1 Arrowood Indem. Co. v. King et al., 605 F.3d 62 (2d Cir. 2010).
2 Aetna Cas. & Sur. Co. v. Murphy, 206 Conn. 409, 418, 538 A.2d at 223.
3 Arrowood Indem. Co. v. King, 39 A.3d 712, (Conn. 2012).

The Use of Shrink Wrap on Roofs

Steven Thomas | Property Insurance Coverage Law Blog | September 7, 2017

I have seen a trend lately which occurs after severe weather impacts an area and damage has been caused by either hail, wind, or extreme amounts of rain (like what I witnessed this past week in Texas), and Contractors have been applying shrink wrap to roofs. Apparently, they use shrink wrap to prevent water from entering the building. When you have a leaky roof, it is costly to repair and annoying to say the least! And yes, shrink wrap can certainly provide a temporary relief from the immediate problem of water coming into the structure; however, every novel idea has its problems too!

Before you allow anyone to shrink wrap your roof, here are a few good suggestions I have for you:

  1. Make certain that you take plenty of photos of any damage that may exist. These photos are essential to justify the installation of the shrink wrap. If you are expecting your insurance carrier to pay for the cost of the shrink wrap covering, it is fair to show them why it was needed.
  2. If a contractor in Texas guarantees that the Insurance Company will PAY for the shrink wrap, they could be violating Texas Insurance laws. Furthermore, ask to look at the photos of damage. If they do not provide you with any photos clearly illustrating the suspected damage, then more likely than not, they are shrink wrapping your roof for no good reason. You could be out thousands of dollars for something you did not need.
  3. With an historic rain event such as the one in Texas this week, water can find numerous ways to enter a structure. Often, it is not from a failed roofing system but a mechanical component on the roof such as an AC unit, grease trap, vent pipe, etc. These components could be the reason water entered the building. I have been performing roof moisture surveys (leak detection) for 25 years and many leaks I find are not from the roofing system, but rather from some mechanical component on the roof. It is always recommended to have someone evaluate your roof with nothing to gain by what they find!
  4. Make certain that the contractor you select to install the shrink wrap has a long record of working in your area. After a storm event, you will inevitably have a plethora of storm chasers in your area offering their services. Many of these companies prey upon the desperation of the consumer in need. As ridiculous as this may sound, Texas has no licensing for roofing contractors so you cannot simply file a complaint against their license.

As we have witnessed through news coverage, catastrophic events can bring out the best in people. Unfortunately, it can also bring out the worst from unscrupulous people as well. The old age adage of “if it sounds too good to be true, it probably is” still rings true today.